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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2002 Commission file number 0-15981
HILB, ROGAL AND HAMILTON COMPANY
(Exact name of registrant as specified in its charter)
Virginia 54-1194795
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
4951 Lake Brook Drive, Suite 500, Glen Allen, VA 23060
(Address of principal executive offices) (Zip Code)
(804) 747-6500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at November 1, 2002
-------------------------- -------------------------------
Common stock, no par value 29,422,983
HILB, ROGAL AND HAMILTON COMPANY
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Statement of Consolidated Income
for the three months and nine months
ended September 30, 2002 and 2001 ....................... 3
Consolidated Balance Sheet,
September 30, 2002 and December
31, 2001 ................... ............................ 4
Statement of Consolidated Shareholders'
Equity for the nine months ended
September 30, 2002 and 2001 ............................. 5
Statement of Consolidated Cash Flows
for the nine months ended September
30, 2002 and 2001 ....................................... 6
Notes to Consolidated Financial
Statements ............................................7-15
Item 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations ...................... 16-21
Item 3. Qualitative and Quantitative Disclosures
About Market Risk ............................. 21
Item 4. Controls and Procedures ....................... 21
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ............21-22
Signatures ................................................................. 23
Certifications ...........................................................24-25
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
STATEMENT OF CONSOLIDATED INCOME
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2001 2002
---- ---- ---- ----
Revenues
Commissions and fees $126,834,193 $86,322,607 $320,221,578 $237,627,788
Investment income 632,848 682,198 1,606,477 1,978,585
Other 1,023,301 604,672 2,233,361 3,704,445
--------- ------- --------- -----------
128,490,342 87,609,477 324,061,416 243,310,818
Operating expenses
Compensation and employee
benefits 69,794,938 47,362,028 175,848,657 132,885,941
Other operating expenses 21,923,639 15,699,868 56,479,205 44,114,833
Depreciation 1,997,753 1,686,561 5,438,196 4,706,904
Amortization of intangibles 1,919,575 3,490,364 3,004,173 10,260,966
Interest expense 3,785,927 2,392,443 7,488,537 7,052,015
--------- --------- --------- ---------
99,421,832 70,631,264 248,258,768 199,020,659
---------- ---------- ----------- -----------
INCOME BEFORE INCOME
TAXES AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 29,068,510 16,978,213 75,802,648 44,290,159
Income taxes 11,819,609 7,300,745 30,868,020 19,044,881
---------- --------- ---------- ----------
INCOME BEFORE
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 17,248,901 9,677,468 44,934,628 25,245,278
Cumulative effect of accounting
change, net of tax - - 3,944,484 -
----------- --------- --------- ----------
NET INCOME $ 17,248,901 $ 9,677,468 $ 48,879,112 $ 25,245,278
============ =========== ============ ============
Net Income Per Share - Basic:
Income before cumulative
effect of accounting change $0.59 $0.35 $1.58 $0.93
Cumulative effect of
accounting change, net of tax - - 0.13 -
----- ----- ----- -----
Net income $0.59 $0.35 $1.71 $0.93
===== ===== ===== =====
Net Income Per Share -
Assuming Dilution:
Income before cumulative
effect of accounting change $0.53 $0.31 $1.41 $0.84
Cumulative effect of
accounting change, net of tax - - 0.12 -
----- ----- ----- -----
Net income $0.53 $0.31 $1.53 $0.84
===== ===== ===== =====
See notes to consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
SEPTEMBER 30, DECEMBER 31,
2002 2001
---- ----
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $114,077,275 $ 51,580,095
Investments 1,636,959 3,499,421
Receivables:
Premiums and commissions, less allowance
for doubtful accounts of $5,398,342 and
$3,374,285, respectively 161,204,177 116,219,367
Other 37,966,570 17,672,780
------------ ------------
199,170,747 133,892,147
Prepaid expenses and other current assets 10,432,202 8,435,944
------------ ------------
TOTAL CURRENT ASSETS 325,317,183 197,407,607
INVESTMENTS 1,200,608 1,335,798
PROPERTY AND EQUIPMENT, NET 20,324,803 19,484,705
GOODWILL 406,073,766 286,554,839
OTHER INTANGIBLE ASSETS 89,676,884 33,516,884
Less accumulated amortization 56,543,312 53,821,407
------------ ------------
439,207,338 266,250,316
OTHER ASSETS 12,498,317 9,764,122
------------ ------------
$798,548,249 $494,242,548
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Premiums payable to insurance companies $247,931,323 $169,501,575
Accounts payable 9,027,972 7,303,804
Accrued expenses 42,226,966 20,302,435
Premium deposits and credits due customers 31,972,137 20,940,410
Current portion of long-term debt 5,515,326 6,996,423
------------ ------------
TOTAL CURRENT LIABILITIES 336,673,724 225,044,647
LONG-TERM DEBT 220,716,831 114,443,224
OTHER LONG-TERM LIABILITIES 22,983,300 11,953,338
SHAREHOLDERS' EQUITY
Common Stock, no par value; authorized
50,000,000 shares; outstanding 29,376,583
and 28,310,568 shares, respectively 89,589,974 55,542,485
Retained earnings 129,775,732 88,604,274
Accumulated other comprehensive income (loss):
Unrealized loss on derivative contracts, net of
deferred tax benefit of $1,074,000 and
$955,000, respectively (1,611,387) (1,433,296)
Other 420,075 87,876
------------ ------------
218,174,394 142,801,339
------------ ------------
$798,548,249 $494,242,548
============ ============
See notes to consolidated financial statements.
4
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK EARNINGS INCOME (LOSS)
--------- -------- -------------
Balance at January 1, 2002 $55,542,485 $ 88,604,274 $(1,345,420)
Issuance of 1,066,015 shares of
Common Stock 34,047,489
Payment of dividends ($.2675 per share) (7,707,654)
Net income 48,879,112
Derivative loss arising during 2002, net of tax (178,091)
Other - - 332,199
----------- ------------ -----------
Balance at September 30, 2002 $89,589,974 $129,775,732 $(1,191,312)
=========== ============= ===========
Balance at January 1, 2001 $22,361,312 $ 65,860,654 $ -
Issuance of 1,609,906 shares of
Common Stock 29,398,366
Purchase of 10,000 shares of Common Stock (211,080)
Payment of dividends ($.26 per share) (7,127,647)
Net income 25,245,278
Cumulative effect of accounting change
related to derivatives, net of tax (516,600)
Derivative loss arising during 2001, net of tax - - (1,141,745)
----------- ------------ -----------
Balance at September 30, 2001 $51,548,598 $ 83,978,285 $(1,658,345)
=========== ============ ===========
See notes to consolidated financial statements.
5
STATEMENT OF CONSOLIDATED CASH FLOWS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30,
2002 2001
---- ----
OPERATING ACTIVITIES
Net income $ 48,879,112 $ 25,245,278
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of accounting change, net of tax (3,944,484) -
Depreciation 5,438,196 4,706,904
Amortization of intangible assets 3,004,173 10,260,966
------------- ------------
Net income plus amortization, depreciation and
cumulative effect of accounting change, net of tax 53,376,997 40,213,148
Provision for losses on accounts receivable 923,085 817,815
Provision for deferred income taxes 2,870,482 -
Loss (gain) on sale of assets 115,181 (2,602,422)
Changes in operating assets and liabilities
net of effects from insurance agency
acquisitions and dispositions:
Increase in accounts receivable (14,079,469) (8,693,132)
Increase in prepaid expenses (610,908) (164,355)
Increase in premiums payable to
insurance companies 14,555,086 5,882,996
Increase in premium deposits and credits due
customers 11,020,726 4,912,293
Decrease in accounts payable (193,731) (1,315,156)
Increase in accrued expenses 10,509,335 5,945,392
Other operating activities (3,592,385) 4,359,960
------------- ------------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 74,894,399 49,356,539
INVESTING ACTIVITIES
Proceeds from maturities of held-to-maturity
investments 2,629,242 857,867
Purchase of investments (611,080) (692,034)
Purchase of property and equipment (4,405,420) (3,684,278)
Purchase of insurance agencies, net of cash acquired (105,559,164) (38,808,587)
Proceeds from sale of assets 1,492,107 4,400,627
Other investing activities 576,857 912,518
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (105,877,458) (37,013,887)
FINANCING ACTIVITIES
Proceeds from long-term debt 160,000,000 37,074,109
Principal payments on long-term debt (57,684,306) (20,810,603)
Debt issuance costs (2,356,075) -
Proceeds from issuance of Common Stock 1,228,274 2,484,325
Repurchase of Common Stock - (211,080)
Dividends (7,707,654) (7,127,647)
------------- ------------
NET CASH PROVIDED BY FINANCING
ACTIVITIES 93,480,239 11,409,104
------------- ------------
INCREASE IN CASH AND CASH EQUIVALENTS 62,497,180 23,751,756
Cash and cash equivalents at beginning of period 51,580,095 28,880,784
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 114,077,275 $ 52,632,540
============= ============
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hilb, Rogal and
Hamilton Company (the Company) have been prepared in accordance with accounting
principles generally accepted in the United States for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine month period ended September 30, 2002,
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2002. For further information, refer to the consolidated
financial statements and footnotes thereto included in the Company's Form 10-K
for the year ended December 31, 2001.
Certain amounts for the prior period have been reclassified to conform to
current year presentation.
NOTE B--CHANGES IN ACCOUNTING METHOD
Effective January 1, 2002, the Company changed its method of accounting for
commissions on premiums billed and collected directly by insurance carriers on
its middle-market property and casualty business. Prior to 2002, this revenue
was recognized when received. Beginning January 1, 2002, this revenue is
recorded on the later of the billing date or the effective date, consistent with
the revenue recognition policy for agency billed business. This is the
predominant practice followed in the industry. Management believes that this new
methodology is preferable and that it better matches the income with the related
expenses. For the three months ended September 30, 2002, the effect of this
change to net income was less than $5,000. For the nine months ended September
30, 2002, the effect of this change was to increase net income by $5.5 million
($0.17 per share), which included the cumulative effect adjustment of $3.9
million ($0.12 per share), net of income taxes of $2.6 million. No prior period
pro forma amounts have been presented to reflect the effect of retroactive
application of the change as it is not practical for the Company to compute
prior period pro forma amounts due to the lack of prior period data.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE C--INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations" (Statement 141),
and No. 142, "Goodwill and Other Intangible Assets" (Statement 142). Statement
141 requires that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. Statement 141 also included guidance
on the initial recognition and measurement of goodwill and other intangible
assets arising from business combinations completed after June 30, 2001. Under
Statement 142, goodwill will no longer be amortized but will be subject to
annual impairment tests. Intangible assets with finite lives will continue to be
amortized over their useful lives. The Company adopted Statement 142 effective
January 1, 2002.
The Company has tested goodwill for impairment using the two-step process
prescribed in Statement 142. The first step is a screen for potential
impairment, while the second step measures the amount of the impairment, if any.
The Company completed the first of the required impairment tests of goodwill as
of January 1, 2002. No impairment charge resulted from this test.
The following table provides a reconciliation of the September 30, 2002 and 2001
reported net income to adjusted net income had Statement 142 been applied as of
January 1, 2001.
For the Three Months Ended For the Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net Income - as reported $17,248,901 $ 9,677,468 $48,879,112 $25,245,278
Goodwill amortization, net of tax - 2,202,702 - 6,271,256
----------- ------------ ----------- -----------
Adjusted net income $17,248,901 $11,880,170 $48,879,112 $31,516,534
=========== ============ ============ ===========
Net Income Per Share - Basic:
Net income - as reported $0.59 $0.35 $1.71 $0.93
Goodwill amortization, net of tax - 0.07 - 0.23
------ ------ ----- -----
Adjusted net income $0.59 $0.42 $1.71 $1.16
====== ====== ===== =====
Net Income Per Share - Assuming
Dilution:
Net income - as reported $0.53 $0.31 $1.53 $0.84
Goodwill amortization, net of tax - 0.07 - 0.21
------ ------ ----- -----
Adjusted net income $0.53 $0.38 $1.53 $1.05
====== ====== ===== =====
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE C--INTANGIBLE ASSETS-Continued
Intangible assets consist of the following:
As of September 30, 2002 As of December 31, 2001
------------------------ -----------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
------ ------------ ------ ------------
Amortizable intangible assets:
Acquired identifiable
intangibles $55,000,000 $ 1,375,000 $ - $ -
Non-compete agreements 29,227,000 7,503,000 27,932,000 6,138,000
Expiration rights 4,950,000 4,696,000 5,085,000 4,601,000
Tradename 500,000 68,000 500,000 53,000
----------- ----------- ----------- -----------
Total $89,677,000 $13,642,000 $33,517,000 $10,792,000
=========== =========== =========== ===========
Indefinite-lived intangible
assets:
Goodwill, net $363,172,000 $243,526,000
The acquired identifiable intangibles relate to the Hobbs Group, LLC acquisition
(see Note E).
Aggregate amortization expense for the nine months ended September 30, 2002 and
2001 was $3,004,000 and $10,261,000, respectively.
Estimated amortization expense:
For year ended December 31, 2002 $4,956,000
For year ended December 31, 2003 7,519,000
For year ended December 31, 2004 7,411,000
For year ended December 31, 2005 7,355,000
For year ended December 31, 2006 7,345,000
For year ended December 31, 2007 7,342,000
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE C--INTANGIBLE ASSETS-Continued
The changes in the net carrying amount of goodwill for the nine months ended
September 30, 2002, are as follows:
Balance as of December 31, 2001 $243,526,000
Goodwill acquired 120,728,000
Goodwill disposed (1,082,000)
-------------
Balance as of September 30, 2002 $363,172,000
============
NOTE D--INCOME TAXES
Deferred taxes result from temporary differences between the carrying amounts of
assets and liabilities for financial statement purposes and the amounts used for
income tax purposes. The Company's effective rate varies from the statutory rate
primarily due to state income taxes and non-deductible amortization.
NOTE E--ACQUISITIONS
On July 1, 2002 the Company acquired all of the issued and outstanding
membership interest units of Hobbs Group, LLC ("Hobbs") other than those owned
by Hobbs IRA Corp. ("HIRAC"), and all of the issued and outstanding capital
stock of HIRAC pursuant to a Purchase Agreement, dated May 10, 2002, by and
among the Company, Hobbs, the members of Hobbs (other than HIRAC) and the
shareholders of HIRAC.
Hobbs is an insurance broker serving upper middle-market and top-tier clients
and provides property and casualty insurance brokerage, risk management and
executive and employee benefits services. This acquisition allows the Company to
expand its capabilities in the upper middle-market and top-tier businesses. In
addition, Hobbs will provide the Company with additional market presence and
expertise in the employee benefits services area and an increased presence into
executive benefits. Hobbs will also bring increased depth to the geographic
reach of the Company's existing national platform.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE E--ACQUISITIONS-Continued
The amount the Company paid in connection with the acquisition consisted of
approximately $116.5 million in cash, which included acquisition costs of $2.3
million and the Company's assumption and retirement of certain debt of Hobbs,
and the issuance to the members of Hobbs (other than HIRAC) and the shareholders
of HIRAC of an aggregate of 719,729 shares of the Company's Common Stock
("Common Stock") valued at $31.6 million. The value of the 719,729 shares issued
was determined based on the average market price of the Company's stock over the
period including two days before and after the date at which the number of
shares to be issued in accordance with the Purchase Agreement became fixed.
In addition, the Company has agreed to pay up to approximately $101.9 million in
cash and shares of Common Stock contingent on Hobbs achieving certain financial
performance goals within the next two years. The Company has further agreed to
assume and satisfy certain existing contingent earn-out and deferred
compensation obligations of Hobbs from Hobbs' prior acquisitions estimated to
approximate a net present value of $30 million. The contingent payments and
assumed existing earn-outs will be recorded when their respective contingencies
are resolved and consideration is paid.
The assets and liabilities of Hobbs have been revalued to their respective
estimated fair values. Intangible assets subject to amortization were estimated
at $55.0 million with an estimated amortization period of 10 years. The excess
purchase price over fair market value of the allocated assets and liabilities of
$100.6 million was allocated to goodwill. The Company is in the process of
obtaining a third-party valuation of certain intangible assets; thus, the
allocation of the purchase price is preliminary and subject to refinement.
The Company's financial statements include the results of Hobbs operations since
the closing date of the acquisition. The following unaudited pro forma results
of operations of the Company give effect to the acquisition of Hobbs as though
the transaction had occurred on January 1, 2002 and 2001, respectively.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE E--ACQUISITIONS-Continued
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Total Revenues $128,490,000 $107,943,000 $375,006,000 $308,227,000
Income before
cumulative effect of
accounting change and
extraordinary item $ 17,249,000 $ 10,402,000 $ 47,395,000 $ 28,519,000
============= ============= ============= =============
Net Income $ 17,249,000 $ 10,402,000 $ 50,929,000 $ 28,519,000
============= ============= ============= =============
Income per share before
cumulative effect of
accounting change
and extraordinary item:
Basic $0.59 $0.36 $1.62 $1.02
===== ===== ===== =====
Assuming Dilution $0.53 $0.33 $1.45 $0.93
===== ===== ===== =====
Net Income Per Share:
Basic $0.59 $0.36 $1.74 $1.02
===== ===== ===== =====
Assuming Dilution $0.53 $0.33 $1.55 $0.93
===== ===== ===== =====
The pro forma net income results for the nine months ended September 30, 2002
include a cumulative effect of accounting change of $3.9 million ($0.12 per
share) related to the Company's change in revenue recognition policy (see Note
B) and an extraordinary loss of $0.4 million ($0.01 per share) related to Hobbs'
debt extinguishment.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE E--ACQUISITIONS-Continued
In addition, the Company entered into a Second Amended and Restated Credit
Agreement (the Amended Credit Agreement), dated as of July 1, 2002. The Amended
Credit Agreement amends and restates an Amended and Restated Credit Agreement,
dated as of April 6, 2001, and provides for a credit facility of up to an
aggregate of $290.0 million. In particular, the Amended Credit Agreement
maintains the availability to the Company of a revolving credit facility in the
aggregate principal amount of $100.0 million and a term loan facility with an
aggregate principal amount of $190.0 million. Pursuant to the Amended Credit
Agreement, the increased term loan facility was made available to finance the
cash payment in connection with the Hobbs acquisition and for working capital
and general corporate purposes.
During the first nine months of 2002, the Company also acquired certain assets
and liabilities of five other insurance agencies for approximately $10,961,000
($9,639,000 in cash and $1,322,000 in other guaranteed future payments) in
purchase accounting transactions. The purchase price may be increased based on
agency profitability per the contracts. These acquisitions are not material to
the consolidated financial statements individually or in aggregate.
NOTE F--SALE OF ASSETS AND OTHER GAINS
During the nine months ended September 30, 2002 and 2001, the Company sold
certain insurance accounts and other assets resulting in a loss of approximately
$115,000 and a gain of $2,602,000, respectively, including a $94,000 gain and a
$20,000 loss during the third quarters of 2002 and 2001, respectively. Revenues,
expenses, assets and liabilities related to these dispositions were not material
to the consolidated financial statements.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE G--NET INCOME PER SHARE
The following table sets forth the computation of basic and diluted net income
per share.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
----------- ----------- ----------- -----------
Numerator for basic net income
per share - net income $17,248,901 $ 9,677,468 $48,879,112 $25,245,278
Effect of dilutive securities:
5.25% convertible debenture 273,185 271,626 818,363 813,759
----------- ----------- ----------- -----------
Numerator for dilutive net income per
share - net income available after
assumed conversions $17,522,086 $ 9,949,094 $49,697,475 $26,059,037
=========== =========== =========== ===========
Denominator
Weighted average shares 29,096,224 27,899,942 28,491,332 27,116,188
Effect of guaranteed future shares to be
issued in connection with an agency
acquisition 28,030 89,208 30,935 62,650
----------- ----------- ----------- -----------
Denominator for basic net income per
share 29,124,254 27,989,150 28,522,267 27,178,838
Effect of dilutive securities:
Employee stock options 1,060,423 814,048 1,050,152 744,086
Employee non-vested stock 133,067 118,838 149,978 98,214
Contingent stock - acquisitions 39,480 56,126 33,073 34,810
5.25% convertible debenture 2,813,186 2,813,186 2,813,186 2,813,186
----------- ----------- ----------- -----------
Dilutive potential common shares 4,046,156 3,802,198 4,046,389 3,690,296
----------- ----------- ----------- -----------
Denominator for diluted net income per
share - adjusted weighted average
shares and assumed conversions 33,170,410 31,791,348 32,568,656 30,869,134
=========== =========== =========== ===========
Net Income Per Share:
Basic $0.59 $0.35 $1.71 $0.93
===== ===== ===== =====
Assuming Dilution $0.53 $0.31 $1.53 $0.84
===== ===== ===== =====
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
HILB, ROGAL AND HAMILTON COMPANY AND SUBSIDIARIES
September 30, 2002
(UNAUDITED)
NOTE H--SUBSEQUENT EVENT
In November 2002, pursuant to a Form S-3 registration statement filed with the
Securities and Exchange Commission, the Company sold 1,150,000 shares of its
Common Stock for net proceeds of approximately $41.2 million. The Company
intends to use the proceeds to repay indebtedness, for acquisitions and for
other general corporate purposes.
Concurrent with this sale, The Phoenix Companies, Inc., agreed to convert all of
the Company's Convertible Subordinated Debentures that it held into 2,813,186
shares of the Company's Common Stock. These debentures were included in the
September 30, 2002 balance sheet at $29.0 million, net of discount, with a 5.25%
interest rate and maturity date of 2014. In connection with the conversion, the
Company amended the voting and standstill agreement with The Phoenix Companies,
Inc. and its subsidiaries.
15
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On July 1, 2002 the Company acquired all of the issued and outstanding
membership interest units of Hobbs Group, LLC ("Hobbs") other than those owned
by Hobbs IRA Corp. ("HIRAC"), and all of the issued and outstanding capital
stock of HIRAC pursuant to a Purchase Agreement, dated May 10, 2002, by and
among the Company, Hobbs, the members of Hobbs (other than HIRAC) and the
shareholders of HIRAC. The assets and liabilities of Hobbs have been revalued to
their respective fair market values. Certain fair value estimates used in the
determination of intangible assets are preliminary and are subject to
refinement. The financial statements of the Company reflect the combined
operations of the Company and Hobbs from the closing date of the acquisition.
Results of Operations:
- ----------------------
Three Months Ended September 30, 2002
Net income for the three months ended September 30, 2002 was $17.2 million, or
$0.53 per share, compared with $9.7 million, or $0.31 per share for the
comparable period last year. Excluding net non-recurring gains and adjusting
amortization to a pro forma basis in 2001 as if the new accounting standards
related to goodwill had been adopted as of January 1, 2001, net income was $17.2
million for the quarter, a 44.6% increase from $11.9 million last year. Net
income per share on the same basis was $0.53, compared with $0.38 last year. See
"Note C - Intangible Assets" of Notes to Consolidated Financial Statements.
Commissions and fees were $126.8 million, an increase of 46.9% from commissions
and fees of $86.3 million during the comparable period of the prior year.
Approximately $32.7 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $0.4 million from the sale of certain offices and accounts in 2002
and 2001. Excluding the effect of acquisitions and dispositions, commissions and
fees increased 9.5%. This reflects new business production and continued
industry-wide premium increases.
Expenses for the quarter increased $28.8 million or 40.8%. Compensation and
benefits, other operating expenses and depreciation expense increased $22.4
million, $6.2 million and $0.3 million, respectively, primarily due to purchase
acquisitions of insurance agencies and increased revenue production.
Amortization of intangibles decreased approximately $1.6 million due primarily
to the adoption of Statement 142 partially offset by new amortization for
intangibles acquired in the Hobbs transaction. Interest expense increased by
$1.4 million due to increased borrowings, primarily related to the Hobbs
acquisition.
The Company's overall tax rate for the three months ended September 30, 2002 was
40.7% compared to 43.0% for the same period of the prior year. The decrease is
primarily related to the non-amortization of goodwill resulting from the
adoption of Statement 142.
16
Nine Months Ended September 30, 2002
For the nine months ended September 30, 2002, net income was $48.9 million, or
$1.53 per share, compared to $25.2 million, or $0.84 per share last year.
Excluding the effect of gains and the 2002 cumulative effect of an accounting
change relating to revenue recognition and adjusting 2001 amortization to a pro
forma basis, net income was $45.0 million, or $1.41 per share, up from $30.0
million or $1.00 per share a year ago.
Commissions and fees were $320.2 million, an increase of 34.8% from commissions
and fees of $237.6 million during the comparable period of the prior year.
Approximately $60.6 million of commissions were derived from purchase
acquisitions of new insurance agencies. This increase was offset by decreases of
approximately $1.8 million from the sale of certain offices and accounts in 2002
and 2001. Commissions and fees, excluding the effect of acquisitions and
dispositions, increased 10.0%. This increase principally reflects new business
production and a continued strong rate environment.
Investment income decreased $0.4 million, or 18.8%, primarily due to a lower
interest rate environment. Other income decreased $1.5 million or 39.7% from the
prior year primarily due to the net impact of nonrecurring gains from the sale
of an agency in 2001, certain insurance accounts and other assets.
Expenses increased by $49.2 million or 24.7%. Increases include $43.0 million in
compensation and benefits, $12.4 million in other operating expenses and $0.7
million in depreciation expense, primarily due to purchase acquisitions of new
insurance agencies and increased revenue production. Amortization of intangibles
decreased approximately $7.3 million due primarily to the adoption of Statement
142. Interest expense increased by $0.4 million due to increased bank borrowings
related primarily to the Hobbs acquisition, offset somewhat, by declines in
interest rates.
The Company's overall tax rate was 40.7% for the nine months ended September 30,
2002 compared to the rate of 43.0% for the nine months ended September 30, 2001.
The decrease was primarily related to the non-amortization of goodwill resulting
from adoption of Statement 142.
Other
For the three months ended September 30, 2002, net income as a percentage of
revenues did not vary significantly from the three months ended June 30, 2002.
Commission income was higher during the third quarter due to acquisitions during
the quarter, primarily Hobbs.
The timing of contingent commissions, policy renewals, acquisitions and
dispositions may cause revenues, expenses and net income to vary significantly
from quarter to quarter. As a result of the factors described above, operating
results for the nine months ended September 30, 2002 should not be considered
indicative of the results that may be expected for the entire year ending
December 31, 2002.
17
Liquidity and Capital Resources:
- --------------------------------
Net cash provided by operations totaled $74.9 million and $49.4 million for the
nine months ended September 30, 2002 and 2001, respectively, and is primarily
dependent upon the timing of the collection of insurance premiums from clients
and payment of those premiums to the appropriate insurance underwriters.
The Company has historically generated sufficient funds internally to finance
capital expenditures for property and equipment. Cash expenditures for the
acquisition of property and equipment were $4.4 million and $3.7 million for the
nine months ended September 30, 2002 and 2001, respectively. The timing and
extent of the purchase and sale of investments is dependent upon cash needs and
yields on alternate investments and cash equivalents. The purchase of insurance
agencies utilized cash of $105.6 million and $38.8 million in the nine months
ended September 30, 2002 and 2001, respectively. Cash expenditures for such
insurance agency acquisitions have been primarily funded through operations and
long-term borrowings. In addition, a portion of the purchase price in such
acquisitions may be paid through the Company's Common Stock and deferred cash
payments. Cash proceeds from the sale of accounts and other assets amounted to
$1.5 million and $4.4 million in the nine months ended September 30, 2002 and
2001, respectively. The Company did not have any material capital expenditure
commitments as of September 30, 2002.
Financing activities provided cash of $93.5 million and $11.4 million in the
nine months ended September 30, 2002 and 2001, respectively. The Company has
consistently made scheduled debt payments and annually increased its dividend
rate. The Company is currently authorized to purchase 748,200 shares. The
Company anticipates the continuance of its dividend policy. As of September 30,
2002, the Company had a bank credit agreement for $286.4 million under which
loans are due in various amounts through 2007, including $152.4 million due in
2007, and 5.25% Convertible Subordinated Debentures with a $32.0 million face
value due 2014. At September 30, 2002, there were loans of $186.4 million
outstanding under the bank agreement, with $100.0 million available under the
revolving portion of the facility for future borrowings.
During the quarter, the Company signed the Second Amended and Restated Credit
Agreement (Amended Credit Agreement). The new agreement amends and restates an
Amended and Restated Credit Agreement dated April 6, 2001. The new agreement
provides a $190.0 million term loan facility ($30.0 million of which was
retained from the previous credit agreement) under which borrowings are due in
various amounts through 2007 including $152.4 million due 2007. The Amended
Credit Agreement also maintains the availability to the Company of a revolving
credit facility in the aggregate principal amount of $100.0 million. The
proceeds were used in part, to fund the cash portion of the Hobbs Group, LLC
acquisition.
The Amended Credit Agreement contains certain covenants that restrict, or may
have the effect of restricting, the payment of dividends or distributions, and
the purchase or redemption by the Company of its capital stock. Management does
not believe that the restrictions contained in the Amended Credit Agreement
will, in the foreseeable future, adversely affect the Company's ability to pay
cash dividends at the current dividend rate.
18
In November 2002, pursuant to a Form S-3 registration statement filed with the
Securities and Exchange Commission, the Company sold 1,150,000 shares of its
Common Stock for net proceeds of approximately $41.2 million. The Company
intends to use the proceeds to repay indebtedness, for acquisitions and for
other general corporate purposes. Concurrent with this sale, The Phoenix
Companies, Inc., agreed to convert all of the Convertible Subordinated
Debentures that it held into 2,813,186 shares of the Company's Common Stock.
These debentures were included in the September 30, 2002 balance sheet at $29.0
million, net of discount, with a 5.25% interest rate and maturity date of 2014.
In connection with the conversion, the Company amended the voting and standstill
agreement with The Phoenix Companies, Inc. and its subsidiaries.
The Company had a current ratio (current assets to current liabilities) of 0.97
to 1.00 as of September 30, 2002. Shareholders' equity of $218.2 million at
September 30, 2002, is improved from $142.8 million at December 31, 2001. The
debt to equity ratio of 1.01 to 1.00 is increased from the ratio at December 31,
2001 of 0.80 to 1.00 due to increased borrowings offset, in part, by the
issuance of Common Stock and increased net income.
The Company believes that cash generated from operations, together with proceeds
from borrowings, will provide sufficient funds to meet the Company's short and
long-term funding needs.
Business Acquisition
- --------------------
On July 1, 2002 the Company acquired all of the issued and outstanding
membership interest units of Hobbs other than those owned by HIRAC, and all of
the issued and outstanding capital stock of HIRAC pursuant to a Purchase
Agreement, dated May 10, 2002, by and among the Company, Hobbs, the members of
Hobbs (other than HIRAC) and the shareholders of HIRAC. Hobbs, which is based in
Atlanta, Georgia, is one of the nation's premier insurance brokers serving upper
middle-market and top-tier clients and provides property and casualty insurance
brokerage, risk management, and executive and employee benefits services. This
acquisition allows the Company to expand its capabilities in the upper
middle-market and top-tier businesses. In addition, Hobbs will provide the
Company with additional market presence and expertise in the employee benefits
services area and an increased presence in executive benefits. Hobbs will also
bring increased depth to the geographic reach of the Company's existing national
platform.
The amount the Company paid in connection with the acquisition consisted of
approximately $116.5 million in cash, which included acquisition costs of $2.3
million and the Company's assumption and retirement of certain debt of Hobbs,
and the issuance to the members of Hobbs (other than HIRAC) and the shareholders
of HIRAC of an aggregate of 719,729 shares of the Company's Common Stock valued
at $31.6 million. In addition, the Company has agreed to pay up to approximately
$101.9 million in cash and shares of Common Stock contingent on Hobbs achieving
certain financial performance goals within the next two years. The Company has
further agreed to assume and satisfy certain existing earn-out and deferred
compensation obligations of Hobbs from Hobbs' prior acquisitions estimated to
approximate a net present
19
value of $30 million. In addition, on July 1, 2002, the Company granted 625,000
stock options to key employees of Hobbs. The options have an exercise price
equal to the fair market value at date of grant, expire in seven years and vest
at a rate of 25% a year for four years.
Market Risk
- -----------
The Company has certain investments and utilizes (on a limited basis) derivative
financial instruments which are subject to market risk; however, the Company
believes that exposure to market risk associated with these instruments is not
material.
New Accounting Standard
- -----------------------
The Company adopted Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" (Statement 142), effective January 1,
2002, which, among other things, ends the practice of amortizing goodwill. Net
income for the three months and nine months ended September 30, 2001 would have
increased by $0.07 and $0.21 per share, respectively, on a pro forma basis,
assuming adoption of Statement 142 as of January 1, 2001. The Company has tested
goodwill for impairment using the two-step process prescribed in Statement 142.
The first step is a screen for potential impairment, while the second step
measures the amount of the impairment, if any. The Company completed the first
of the required impairment tests of goodwill as of January 1, 2002. No
impairment charge resulted from this test.
Change in Accounting Principle
- ------------------------------
Effective January 1, 2002, the Company changed its method of accounting for
commissions on premiums billed and collected directly by insurance carriers on
its middle-market property and casualty business. Prior to 2002, this revenue
was recognized when received. Beginning January 1, 2002, this revenue is
recorded on the later of the billing date or the effective date, consistent with
the revenue recognition policy for agency billed business. This is the
predominant practice followed in the industry. Management believes that this new
methodology is preferable and that it better matches the income with the related
expenses. For the three months ended September 30, 2002, the effect of this
change to net income was less than $5,000. For the nine months ended September
30, 2002, the effect of this change was to increase net income by $5.5 million
($0.17 per share), which included the cumulative effect adjustment of $3.9
million ($0.12 per share), net of income taxes of $2.6 million. No prior period
pro forma amounts have been presented to reflect the effect of retroactive
application of the change as it is not practical for the Company to compute
prior period pro forma amounts due to the lack of prior period data.
Forward-Looking Statements
- --------------------------
The Company cautions readers that the foregoing discussion and analysis includes
"forward-looking statements" within the meaning of Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbor created by
that Act. These forward-looking statements are believed by the Company to be
reasonable based upon management's current knowledge and assumptions about
future events, but are subject to the uncertainties generally
20
inherent in any such forward-looking statement, including factors discussed
above as well asother factors that may generally affect the Company's business,
financial condition or operating results. Reference is made to the discussion of
"Forward-Looking Statements" contained in "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 2001, regarding important
risk factors and uncertainties that could cause actual results, performance or
achievements to differ materially from future results, performance or
achievements expressed or implied in any forward-looking statement made by or on
behalf of the Company.
Item 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is set forth under the caption
"Market Risk" in Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Item 4. CONTROLS AND PROCEDURES
Within 90 days of the filing of this report on Form 10-Q, the Company's
management, including the chief executive officer and the chief financial
officer, performed an evaluation of the effectiveness of the design and
operation of the Company's disclosure controls and procedures (as defined in
Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of
1934, as amended). Based on that evaluation, the Company's management, including
the chief executive officer and chief financial officer, concluded that the
Company's disclosure controls and procedures were effective as of that
evaluation date. There have been no significant changes in the Company's
internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation.
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
Exhibit No. Document
----------- --------
10.1 Amended and Restated Voting and Standstill Agreement,
dated November 7, 2002, by and among the Company, The
Phoenix Companies, Inc., Phoenix Life Insurance
Company and PM Holdings, Inc.
99.1 Certification Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
21
Exhibit No. Document
----------- --------
99.2 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350
b) Reports on Form 8-K
Information required by this item was previously reported in the Company's
Form 10-Q for the quarter ended June 30, 2002.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hilb, Rogal and Hamilton Company
--------------------------------
(Registrant)
Date November 13, 2002 By: /s/Andrew L. Rogal
--------------------------- -----------------------------------
Chairman and Chief Executive
Officer
(Principal Executive Officer)
Date November 13, 2002 By: /s/Carolyn Jones
--------------------------- -----------------------------------
Senior Vice President, Chief
Financial Officer and Treasurer
(Principal Financial Officer)
Date November 13, 2002 By: /s/Robert W. Blanton, Jr.
--------------------------- -----------------------------------
Vice President and Controller
(Chief Accounting Officer)
23
CERTIFICATIONS
I, Andrew L. Rogal, Chief Executive Officer of Hilb, Rogal and Hamilton Company,
certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hilb, Rogal
and Hamilton Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/Andrew L. Rogal
------------------ --------------------------------------------
Andrew L. Rogal
Chief Executive Officer
24
I, Carolyn Jones, Senior Vice President, Chief Financial Officer and Treasurer
of Hilb, Rogal and Hamilton Company, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hilb, Rogal
and Hamilton Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about
the effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability
to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 13, 2002 /s/Carolyn Jones
------------------ --------------------------------------------
Carolyn Jones
Senior Vice President, Chief
Financial Officer and Treasurer
25
HILB, ROGAL AND HAMILTON COMPANY
EXHIBIT INDEX
Exhibit No. Document
----------- --------
10.1 Amended and Restated Voting and Standstill Agreement,
dated November 7, 2002, by and among the Company, The
Phoenix Companies, Inc., Phoenix Life Insurance
Company and PM Holdings, Inc.
99.1 Certification Statement of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
99.2 Certification Statement of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350